Financial Crisis

[passinginterest]

Why would Renewable energies be regarded as a bubble to burst?
Is it subsidised to make the Kw price competitive?

On the surface it ticks some important boxes, it is local based, creates labour, less imports.

I think Pete is suggesting that renewable energy might be the next big boom industry. Which we'll then allow our economy to become massively over dependent on and when energy markets suffer a decline the country will go into meltdown, perpetuating the cycle.

[geysir]

I see.
Still, investing in something that reaps benefit on so many hard core aspects is a solid enough investment also that type of investment is spread out over different types of renewable energy, diversifying dependance.

[pineapple stu]

Premiership football?
What happens if BSKY or Setanta can't refinance their debt, or the football clubs themselves?

Similar to the ITV Digital collapse, I suppose. Clubs going into adminstration all over the place, but ultimately surviving, albeit much cut back.

[pete]

I think Pete is suggesting that renewable energy might be the next big boom industry.

Yes. It might be a bubble but need something new to drag out of the slump.

Ireland is almost completely dependent on foreign multinationals with no significant local employers exporting products/services.

[OneRedArmy]

I was only giving an example of one regulation that was changed, re cash reserves.
You asked was I sure.
I pointed out the link to you.
No one ever says thanks

Thanks for quoting the link, but it was wikipedia and wasn't particularly accurate and thats being kind

I see Stuttgart is calling capitulation, the problem is that you only know the bottom after the fact.

I've incorrectly called it twice so far!!!

The non-financial treasury market is very worrying (ABCP etc.). Banks need to be forced to lend to "real economy" companies as part of Government bailouts.

[geysir]

Thanks for quoting the link, but it was wikipedia and wasn't particularly accurate and thats being kind

AFAICS the Wiki reference to reserve requirement was accurate.
The statistics to the cash reserves requirement was quoted from the IMF figures.
The explanations on the Wiki may not be so accurate but I am not referring to those explanations.

AFAIU a bank's Cash Reserves is a ratio of cash held in reserve to deposits.
Bank hold in reserve a certain % of its liabilities (savers deposits)
It is the 3rd tool of monetary policy.
Imposed Cash Reserve requirements has the effect of putting a ceiling on Bank lending thus putting a ceiling on Bank's exposure to loans it gives out.
I would question when you say that the reduction in cash reserve requirements over the last 35 years for Banks is irrelevant.

[geysir]

The day after stonewalling the Brits attempts to hold every Icelander, man woman and child, bondage to a personal debt of approx £30k each and all that on top of insults and previous grevious injuries already inflicted, the Ice Gov signed a deal with the IMF for a loan of US$2bn.
I don't know what the terms are but the IMF guy sounds very positive about the 'bouncebackability' of Iceland
By my reckoning, that's a couple of months supply of heroin and B&B paid for.
There is some benefit to being first in the queue.
Apparantly for some reasons yet unknown, the survival of this Island is important for the survival of Western civilization.
Meantime, while we are on our mainline drip, we can listen to the long drawn out death rattle of the Celtic Tiger.

[mypost]

if Ireland hadn't joined the Euro (if me granny... etc.), we'd be Iceland Mark II. Thankful for small mercies etc...

That I find strange as the Brits never joined the Euro either. And I want them to join it.

[OneRedArmy]

AFAICS the Wiki reference to reserve requirement was accurate.
The statistics to the cash reserves requirement was quoted from the IMF figures.
The explanations on the Wiki may not be so accurate but I am not referring to those explanations.

AFAIU a bank's Cash Reserves is a ratio of cash held in reserve to deposits.
Bank hold in reserve a certain % of its liabilities (savers deposits)
It is the 3rd tool of monetary policy.
Imposed Cash Reserve requirements has the effect of putting a ceiling on Bank lending thus putting a ceiling on Bank's exposure to loans it gives out.
I would question when you say that the reduction in cash reserve requirements over the last 35 years for Banks is irrelevant.

Thats not correct, at least in the EU. Liquidity is pretty much self-managed. Loan to deposit ratios vary hugely. From around 100% for the more conservative savings banks to 280% for PTSB (Northern Rock was similarly high). Banks have been free to decide how much they leverage their book with market funding, within the constraints of the capital adequacy legislation I linked above.

[geysir]

I looked over that link but (my fault) I can't find a good table/graph/summary which sets out the minimum Capital Requirements (as in Bank cash or assets that can be quickly liquidised).
But I do find that the Directives are blessed by Charlie McC. (sirens, alarms bells).
"A key aspect of the new framework is its flexibility. This provides institutions with the opportunity to adopt the approaches most appropriate to their situation and to the sophistication of their risk management."
That reads to me, as let the Investment/Lending Institutions work out what's best for themselves.

In general that system works until debtors forfeit their mortgages because the mortgage payments far exceed the value of the house for which they took the loan or/and their ability to repay is reduced. And this works okay until people lose confidence in their bank and want to withdraw their money or at least reduce their deposit.
At that stage you get a run on the bank, which - under such circumstances (the current circumstances) - is greatly undercapitalized. Two things can happen then. Either the bank collapses or someone (like the government) steps in to prop up the bank. But if the government does that - and the government itself is already in debt - then confidence might not be very high in this solution, especially when middle- and lower-income taxpayers realize that they are the ones who ultimately end up footing a bill that is likely (as past and present history shows) to only put more money in the pockets of rich and greedy investment institutions.

On another point, MMR?, what has the BOE done here in plain English?
from the BOE annual report 2007 page 36.
Banking Department balance sheet
'The principal reason for the increase in the Banking
Department balance sheet, £39.4 billion at 28 February
2007 (2005/06: £24.8 billion), was the introduction of
Money Market Reform (MMR) in May 2006. The new
framework is based on a reserves-averaging system, with
reserves-scheme participants electing to maintain a target
balance on average over a maintenance period running
from one MPC meeting to the next. These balances are
reflected in ‘deposits from banks and building societies’ on
the Banking Department balance sheet and have been
matched by an increase in the Bank’s lending via
short-term open market operations (OMOs), ‘loans and
advances to banks’. At 28 February 2007, around
£20.3 billion of Banking Department’s assets comprised
sterling money market refinancing provided through the
Bank’s OMOs (2005/06: £3.2 billion). The size of the Issue
Department’s deposit with Banking Department has
remained close to £50 million'.

[OneRedArmy]

I looked over that link but (my fault) I can't find a good table/graph/summary which sets out the minimum Capital Requirements (as in Bank cash or assets that can be quickly liquidised).].

There isn't a good summary as its complicated. Very, very complicated. Broadly for large banks its internally driven by credit models which predict the probability of default, loss given default and exposure at default. See below.

But I do find that the Directives are blessed by Charlie McC. (sirens, alarms bells).
"A key aspect of the new framework is its flexibility. This provides institutions with the opportunity to adopt the approaches most appropriate to their situation and to the sophistication of their risk management."
That reads to me, as let the Investment/Lending Institutions work out what's best for themselves.

Broadly correct. They earn the right to self-determine their own regulatory capital based on a long and rigorous approval process by regulators which is subject to ongoing review. They are various floors, limits and other checks that ensure that capital is adequate.

These changes (known as Basel II) are only in the process of coming into force and are only bedding in so this crisis was too early to test them.

In general that system works until debtors forfeit their mortgages because the mortgage payments far exceed the value of the house for which they took the loan or/and their ability to repay is reduced.

Not exactly, you use models to predict this and the problems occur when the models don't correctly predict the number and magnitude of defaults.

And this works okay until people lose confidence in their bank and want to withdraw their money or at least reduce their deposit. .

Whoa, this is now liquidity risk, not credit risk, which is what you were discussing above.

At that stage you get a run on the bank, which - under such circumstances (the current circumstances) - is greatly undercapitalized. .

No, does not follow. A bank run will kill any bank, regardless of their loan profile. To date, its been fear of future credit losses that have caused liquidity issues, not actual credit losses.

The whole premise of the western banking system over the last century or so is that bank runs are rare (e.g. 150 years since the last one in the UK pre-Northern Rock) and that either

the bank collapses or someone (like the government) steps in to prop up the bank.

Obviously the events of the last year have caused the whole area of liquidity risk management to be completely re-defined and its likely, that when the dust settles, a more quantitative approach to liquidity management will emerge. But its too early for that to be realistically be expected at this stage.

[Bald Student]

Having not understood any of that, can someone tell me whether the losses the banks are likely to make over the next few years will be greater or less than the profits they've accumulated over the last few years? That is, were they gambling their own money or depositors money?

[OneRedArmy]

Having not understood any of that, can someone tell me whether the losses the banks are likely to make over the next few years will be greater or less than the profits they've accumulated over the last few years? That is, were they gambling their own money or depositors money?

Depends how much depositers money is left in the bank and what the credit losses are!

If you take the extreme example and assume every loan a bank has extended isn't repaid, then yes, this won't cover savings. Obviously this example is as extreme as to be irrelevant, but then we just get into arguing about the future level of credit losses and deposit gains and losses.

[Bald Student]

Depends how much depositers money is left in the bank and what the credit losses are!

If you take the extreme example and assume every loan a bank has extended isn't repaid, then yes, this won't cover savings. Obviously this example is as extreme as to be irrelevant, but then we just get into arguing about the future level of credit losses and deposit gains and losses.

Why would it depend on how much depositors money is left in the bank?

If I may ask a simpler question then, do we know what the accumulated profits of the banks are?

[pete]

Iceland Interest Rate increased to 18% today. Inflation running at 15% apparently.

Need to put in a foot..ie change request for detailed financial jargon filter

[OneRedArmy]

Why would it depend on how much depositors money is left in the bank?

If I may ask a simpler question then, do we know what the accumulated profits of the banks are?

Remember that banks have historically paid out a sizeable percentage of their profits immediately as dividends to shareholders so they don't carry huge retained profits year on year.

Therefore the retained profits, along with the rest of the capital base, is nowhere near enough to pay back all deposits, credit losses or no credit losses. This isn't just an Irish issue, banks, in general, cannot repay all depositors if they all land on the doorstep at any given time. This is liquidity risk (the fact that there is a maturity mismatch between a banks assets [loans] and its liabilities [deposits]). You phrased it in the "are they gambling the depositors money" way. The broad answer to this is yes, thats what banking is all about. Banks earn a risk premia (profit) as depositors demand a certainty over the security of their deposits, whilst their is an inherent risk of non-repayment in each and every loan a lender writes. Thats credit risk. How banks fund and leverage their loan book impacts their liquidity as the more assets they hold in cash or liquid instruments reduces the amount they can loan out for better return.

So banking by its nature is a large balancing act, that is firmly based on past experience as a guide to the future. And just like the ad says, sometime past performance is no guarantee of future return, and in this case it wasn't.

"one in one hundred" or "tail event" are words you'll hear very often in finance. They refer to the likelihood of a particular event occuring as being 1%, i.e. on average once a century.

This is important, as the closer you move to the tail (the unlikeliest of events) the more it costs to ensure the event doesn't happen, and on a marginal basis, the marginal cost increases hugely.

Therefore many banks over the last 3-5 years stressed their portfolios to cope with a 1 in 10,25 or even 1 in 50 event. What we are going through is widely acknowledged as a 1 in 100 event that very few banks (if any) would've planned for as the cost of protecting themselves against it would likely have been too onerous and uncompetitive to bear unless all banks globally were forced to do the same.

I'm trying to make this an uncomplicated as possible, obviously failing somewhat, but in some areas it isn't easy to explain. I've been working at it for coming up on 10 years and I'm still learning every day.

[Student Mullet]

Would it be correct then to say that the banks will likely make a loss of more than their accumulated profits, requiring them to get money from somewhere, like the government, to make up the difference?

Also, do we know what those accumulated profits are?

[OneRedArmy]

Would it be correct then to say that the banks will likely make a loss of more than their accumulated profits, requiring them to get money from somewhere, like the government, to make up the difference?

Also, do we know what those accumulated profits are?

What will force a capital injection (probably underwritten by Govt) is for losses to reduce the capital ratio to an unacceptably low level. Very broadly, capital is made up of shareholders equity & cash-type instruments.

As stated above, accumulated profits are an irrelevance when they have been paid out to shareholders they can't be returned.

Have a look at the annual report of any of the large banks on their websites for more info on the composition of balance sheet & the annual P&L.

[Student Mullet]

Very broadly, capital is made up of shareholders equity & cash-type instruments.

Thanks, I think that's the point that had me confused. Is it correct then to say that capital includes money that the bank has on deposit?

In my simplistic model of the situation I've divided the money in the bank into two categories. The first is money that belongs to the bank like accumulated profits (minus whatever they've given back to shareholders) and the second is money that the bank is minding for someone else like peoples deposits or a loan from another bank.

The point of my questioning is to find out whether the losses that they're likely to make is greater than the amount of their money that belongs to them because if it is they'll have to dip into the second pool to make up the difference.

Unless I'm misunderstanding you, you're using the word 'capital' to describe a mix of both types of money.

[shantykelly]

Therefore many banks over the last 3-5 years stressed their portfolios to cope with a 1 in 10,25 or even 1 in 50 event. What we are going through is widely acknowledged as a 1 in 100 event that very few banks (if any) would've planned for as the cost of protecting themselves against it would likely have been too onerous and uncompetitive to bear unless all banks globally were forced to do the same.

in engineering we call that storm events, and the recent meteorlogical problems in ireland with floods and what not give you an indication of how good are preparations against these events are.